[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27446]
[[Page Unknown]]
[Federal Register: November 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20667; File No. 812-9154]
DFA Investment Dimensions Group Inc. et al.
October 31, 1994.
AGENCY: U.S. Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: DFA Investment Dimensions Group Inc. (the ``Fund''),
Dimensional Fund Advisors Inc. (``DFA''), and certain life insurance
companies (``Participating Insurance Companies'') and their separate
accounts (``Separate Accounts'')--the Fund, DFA, the Participating
Insurance Companies, and the Separate Accounts are referred to herein
collectively as the ``Applicants.''
RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of
the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit shares of the Fund to be offered and sold to
variable annuity and variable life insurance separate accounts issued
by both affiliated and unaffiliated life insurance companies.
FILING DATE: The application was filed on August 10, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and by serving the Applicants (in care of the Fund or DFA)
with a copy of the request, personally or by mail. Hearing requests
must be received by the Commission by 5:30 p.m. on November 25, 1994,
and should be accompanied by proof of service on the Fund or DFA, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issue contested. Persons may request
notification of a hearing by writing to the Secretary of the
Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, c/o Stradley, Ronon, Stevens & Young, Great Valley
Corporate Center, 30 Valley Stream Parkway, Malvern, PA 19355, Attn:
Stephen W. Kline, Esq.
FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Attorney, Division
of Investment Management, Office of Insurance Products, at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations
1. DFA is a corporation organized under the laws of Delaware, and
is registered as an investment adviser under the Investment Advisers
Act of 1940. DFA serves as investment adviser for the Fund.
2. The Fund is a Maryland corporation registered under the 1940 Act
as an open-end, diversified management investment company. The Fund
currently consists of, and offers shares of common stock (``shares'')
in, nineteen separate investment portfolios, each of which has its own
investment objectives and policies. Shares of two of those portfolios
presently are offered only to a separate account of National Home Life
Assurance Company which, in connection with its issuance of variable
annuity contracts, is registered as a unit investment trust under the
1940 Act.
3. The Fund intends to offer shares of its portfolios to Separate
Accounts of additional insurance companies--including insurance
companies that are not affiliated with National Home Life Assurance
Company--and to serve as the investment vehicle for various types of
insurance products, including variable annuity contracts, single
premium variable life insurance contracts, scheduled premium variable
life insurance contracts, and flexible premium variable life insurance
contracts (collectively referred to herein as ``variable contracts'').
Such Participating Insurance Companies will establish their own
separate accounts and design their own variable annuity or variable
life insurance contracts. It is anticipated that Participating
Insurance Companies will rely on Rules 6e-2 or 6e-3(T) under the 1940
Act, as appropriate, with respect to their scheduled premium and
flexible premium variable life insurance contracts; some Participating
Insurance Companies may rely on individual exemptive orders as well.
4. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts is referred to herein as ``mixed
funding.'' The use of a common management company as the underlying
investment medium for separate accounts of unaffiliated insurance
companies is referred to herein as ``shared funding.''
5. Applicants submit that making the Fund available for ``mixed''
and ``shared'' funding will encourage more insurance companies to offer
variable contracts, and that this should result in increased
competition with respect to both variable contract design and pricing,
which, in turn, can be expected to result in more product variation and
lower charges. Applicants submit that ``mixed'' and ``shared'' funding
should provide several benefits to variable contract owners, including,
among other things: elimination of a sufficient portion of the costs of
establishing and administering separate funds; and making a greater
amount of assets available for investment, thereby promoting economies
of scale, permitting increased safety through greater diversification,
and making the addition of new portfolios more feasible.
6. Applicants see no significant legal impediment to permitting
``mixed'' and ``shared'' funding. Nor do Applicants believe that
``mixed'' and ``shared'' funding will have any adverse federal income
tax consequences. Applicants represent that separate accounts organized
as unit investment trusts historically have been employed to accumulate
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account. Accordingly, Applicants
request an order of the Commission exempting the Participating
Insurance Companies and their Separate Accounts (and, as necessary, any
principal underwriter and depositor of each such Separate Account) from
Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act, and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit ``mixed'' and ``shared'' funding.
Applicants' Legal Analysis
1. Applicants request relief under Section 6(c) of the 1940 Act for
the class of insurers and Separate Accounts investing in the Fund (and
principal underwriters and depositors of such Separate Accounts).
Applicants represent that there is ample precedent, in a variety of
contexts, for granting exemptive relief not only to applicants in a
given case, but also to members of the class not currently identified
that may be similarly situated in the future. Applicants further
represent that such class relief has been granted from a number of the
provisions of the 1940 Act. Applicants note that the Commission staff
will have an opportunity to review the compliance by Participating
Insurance Companies with the conditions of the requested order at the
time each Separate Account files its registration statement.
2. Rule 6e-2(b)(15) provides partial exemptions from Sections 9(a),
13(a), 15(a) and 15(b) of the 1940 Act, only if the separate account is
organized as a unit investment trust, all of the assets of which
consist of the shares of one or more registered investment companies
(``underlying fund(s)'') which offer their shares ``exclusively to
variable life insurance separate accounts of the life insurer or any
affiliated life insurance company'' (emphasis supplied). The exemptions
are not available to a scheduled premium variable life insurance
separate account that owns shares of an underlying fund that also
offers its shares to a variable annuity separate account of the same
insurance company or any unaffiliated insurance company. Nor is the
relief granted by Rule 6e-2(b)(15) available if the underlying fund
also offers its shares to separate accounts funding variable contracts
of unaffiliated life insurance companies. In short, Rule 6e-2 permits
neither ``mixed'' nor ``shared'' funding.
3. Rule 6e-3(T)(b)(15) provides exemptions similar to those
provided by Rule 6e-2(b)(15), only if the separate account is organized
as a unit investment trust, all of the assets of which consist of
shares of underlying funds which offer their shares ``exclusively to
separate accounts of the life insurer, or of any affiliated life
insurance company offering either scheduled contracts or flexible
contracts, or both; or which also offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company, or which offer their shares to any such life
insurance company in consideration solely for advances made by the life
insurer in connection with the operation of the separate account''
(emphasis supplied). In short, Rule 6e-3(T) permits mixed funding with
respect to a flexible premium variable life insurance separate account,
but it does not permit shared funding.
4. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a) (1) or (2) of the 1940 Act.
5. Rules 6e-2(b)(15) (i) and (ii) and 6e-3(T)(b)(15) (i) and (ii)
under the 1940 Act provide exemptions from Section 9(a) under certain
circumstances, subject to the limitations on ``mixed'' and ``shared''
funding imposed by the 1940 Act and the rules promulgated thereunder.
These exemptions limit the application of the eligibility restrictions
to affiliated individuals or companies that participate directly in the
management of the underlying registered management investment company.
6. Applicants state that the partial relief from the requirements
of Section 9 of the 1940 Act granted in Rules 6e-2(b)(15) and 6e-
3(T)(B)(15), in effect, limits the amount of monitoring necessary to
ensure compliance with Section 9 to that which is appropriate in light
of the policy and purposes of Section 9. Applicants state that Rules
6e-2(b)(15) and 6e-3(T)(b)(15) recognize that neither the protection of
investors nor the purposes fairly intended by the policy and provisions
of the 1940 Act requires the application of the provisions of Section
9(a) to the many individuals in a large insurance company complex, most
of whom will have no involvement in matters pertaining to investment
companies in that organization. Applicants further state that Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) recognize that it is unnecessary to apply
Section 9(a) to individuals in various unaffiliated insurance companies
(or affiliated companies of Participating Insurance Companies) that may
utilize the Fund as the funding medium for variable contracts.
7. Applicants assert that no regulatory purpose is served by
extending the Section 9(a) monitoring requirements in the event of
``mixed'' or ``shared'' funding. In this regard, Applicants note that
the Participating Insurance Companies are not expected to play any role
in the management or administration of the Fund; those individuals who
currently participate in the management or administration of the Fund
will remain the same regardless of which Separate Accounts or insurance
companies use the Fund. For these reasons, Applicants submit that
applying the monitoring requirements of Section 9(a) because of
investment by separate accounts of other insurers would be unjustified
and would not serve any regulatory purpose. Applicants further submit
that increased monitoring costs would reduce the net rates of return
realized by contract owners.
8. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the Participating
Insurance Companies the right to disregard voting instructions of
contract holders. More specifically, Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) provide partial exemption from Sections 13(a), 15(a),
and 15(b) of the 1940 Act to the extent those sections have been deemed
by the Commission to require ``pass-through'' voting with respect to an
underlying fund's shares.
9. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide
that the insurance company may disregard the voting instructions of it
owners with respect to the investments of an underlying fund, or any
contract between a fund and its investment adviser, when required to do
so by an insurance regulatory authority (subject to the provisions of
paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T)).
10. Rules 6e2(b)(15)(iii)(B) and 6e3(T)(b)(15)(iii)(A)(2)\1\
provide that the insurance company may disregard voting instructions of
contract owners if the contract owners initiate any change in such
insurance company's investment policies, principal underwriter, or any
investment adviser (provided that disregarding such voting instructions
is reasonable and subject to the other provisions of paragraphs
(b)(5)(ii), (b)(7)(ii)(B) or (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T)).
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\1\Applicants represent that the application will be amended
during the notice period to refer to Rule 6e-3(T)(15)(b)(iii)(A)(2),
rather than 6e3(T)(b)(15)(iii)(B), in the discussion under the
heading ``Pass-Through Voting.''
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11. Applicants represent that in the case of a change in the
insurance company's investment policies, the insurance company, in
order to disregard contract owner voting instructions, must make a
good-faith determination that such a change would violate state law, or
would result in investments that either would be inconsistent with the
investment objectives of the separate account or would vary from the
general quality and nature of investments and investment techniques
used by other separate accounts of the company or of an affiliated life
insurance company with similar investment objectives. Applicants
represent that in the case of a change of an investment adviser, the
insurance company, in order to disregard contract owners' voting
instructions, must make a good-faith determination that either: (a) The
adviser's fees would exceed the maximum rate that may be charged
against the separate account's assets; or (b) the proposed adviser may
be expected to employ investment techniques that either (i) would vary
from the general techniques used by the current adviser, or be used to
manage the investments in a manner inconsistent with the investment
objectives of the Separate Account, or (ii) would result in investments
that vary from certain standards.
12. Applicants submit that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to the
advisability or legality of a change in investment policies, principal
underwriter, or investment adviser initiated by contract owners.
Applicants also state that the potential for disagreement is limited by
the requirements in Rule 6e-2 and 6e-3(T) that the Participating
Insurance Company's disregard of voting instructions be reasonable and
based on specific good-faith determinations.
Applicants' Conditions
If the requested order is granted, Applicants consent to the
following conditions:
1. A majority of the directors of the Fund shall consist of persons
who are not ``interested persons'' of the Fund (as defined in Section
2(a)(19) of the 1940 Act, the rules promulgated thereunder, and as
modified by any applicable orders of the Commission). If this condition
is not met by reason of the death, disqualification, or bona-fide
resignation of any director(s), then the operation of this condition
shall be suspended: (a) For a period of 45 days, if the vacancy or
vacancies may be filled by the directors; (b) for a period of 60 days,
if a vote of shareholders is required to fill the vacancy or vacancies;
or (c) for such longer period as the Commission may prescribe by order
upon application.
2. The board of directors of the Fund will monitor the Fund for the
existence of any material irreconcilable conflict between the interests
of the contract owners of all Separate Accounts investing in the Fund.
A material irreconcilable conflict may arise for a variety of reasons,
including: (a) An action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Fund portfolio are being
managed; (e) a difference in voting instructions given by variable
annuity contract owners and variable life insurance contract owners; or
(f) a decision by an insurer to disregard the voting instructions of
contract owners.
3. Participating Insurance Companies and DFA will report any
potential or existing conflicts to the board of directors.
Participating Insurance Companies and DFA will provide the directors
with all information reasonably necessary for them to consider any
issues raised by such conflicts and, more generally, will be
responsible for assisting the directors in carrying out their
responsibilities under these conditions. In addition, each
Participating Insurance Company will inform the directors whenever
contract owner voting instructions are disregarded. The responsibility
to report such information and conflicts to, and to assist, the
directors will be a contractual obligation of all insurers investing in
the Fund under their agreements governing participation in the Fund.
These responsibilities will be carried out with a view only to the
interests of the contract owners.
4. If a majority of the board of directors, or a majority of the
disinterested directors, determines that a material irreconcilable
conflict exists, then the relevant insurance companies, at their
expense and to the extent reasonably practicable (as determined by a
majority of the disinterested directors), shall take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict.
Such steps may include: (a) Establishing a new registered management
investment company or managed separate account; or (b) withdrawing from
the Fund or any of its portfolios the assets allocable to some or all
of the Separate Accounts, and reinvesting such assets in a different
investment medium (including another portfolio of the Fund), or
submitting the question as to whether such segregation should be
implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group i.e.,
annuity contract owners or life insurance contract owners of one or
more Participating Insurance Companies) that votes in favor of such
segregation, or offering the affected contract owners the option of
making such a change.
5. If a material irreconcilable conflict arises because of a
decision by a Participating Insurance Company to disregard contract
owner voting instructions, and that decision represents a minority
position or would preclude a majority vote, then the insurer may be
required, at the Fund's election, to withdraw the investment in the
Fund by that insurer's Separate Account; no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take
remedial action in the event of the directors' determination of a
material irreconcilable conflict and to bear the cost of such remedial
action shall be a contractual obligation of all Participating Insurance
Companies under their agreements governing participating in the Fund.
These responsibilities will be carried out with a view only to the
interests of contract owners.
6. For purposes of the condition set forth in paragraphs 4 and 5
above, a majority of the disinterested directors shall determine
whether the proposed action adequately remedies any material
irreconcilable conflict. In no event will the Fund or DFA be required
to establish a new funding medium for any variable contract. The
condition (paragraphs 4 and 5) will not be construed to require a
Participating Insurance Company to establish a new funding medium for
any variable contract if an offer to do so has been declined by vote of
a majority of the contract owners adversely affected in a material way
by the material irreconcilable conflict.
7. If a material irreconcilable conflict arises because of an
insurer's decision to disregard contract owner voting instructions and
that decision represents a majority position or would preclude a
majority vote, then the Participating Insurance Company may be
required, at the Fund's election, to withdraw the investment in the
Fund by the insurer's Separate Account; no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take
remedial action in the event of the determination (by the directors of
the Fund) of a material irreconcilable conflict, and to bear the costs
of such remedial action, shall be a contractual obligation of all
Participating Insurance Companies under their agreements governing
participation in the Fund. These responsibilities will be carried out
with a view only to the interest of contract owners.
8. For purposes of the condition set forth in paragraph 7 above, a
majority of the disinterested directors shall determine whether any
proposed action adequately remedies any material irreconcilable
conflict. The Fund and the Fund's investment adviser will not be
required to establish a new funding medium for any variable contract.
Moreover, no Participating Insurance Company shall be required by that
condition (paragraph 7) to establish a new funding medium for any
variable contract if any offer to do so has been declined by vote of a
majority of the contract owners adversely affected in a material way by
the material irreconcilable conflict.
9. The determination by the directors of the Fund of the existence
of a material irreconcilable conflict and the implications of that
conflict shall be made known promptly, in writing, to all Participating
Insurance Companies.
10. Participating Insurance Companies will provide pass-through
voting privileges to all variable contract owners as long as the
Commission continues to interpret the 1940 Act to require pass-through
voting privileges for variable contract owners. Accordingly,
Participating Insurance Companies will vote shares of the Fund held in
their respective Separate Accounts in a manner consistent with voting
instructions timely-received from contract owners. Each Participating
Insurance Company will vote shares of the Fund held in its respective
Separate Accounts for which no voting instructions from contract owners
are timely-received, as well as shares of the Fund which the
Participating Insurance Company owns, in the same proportion as those
shares of the Fund for which voting instructions from contract owners
are timely-received. Each Participating Insurance Company shall be
responsible for assuring that its Separate Accounts participating in
the Fund calculate voting privileges in a manner consistent with other
Participating Insurance Companies. The obligation to calculate voting
privileges in a manner consistent with all other Separate Accounts
investing in the Fund shall be a contractual obligation of all
Participating Insurance Companies under their agreements governing
participation in the Fund.
11. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders. More specifically, the Fund will
either: (a) Provide for annual meetings (except insofar as the
Commission may interpret Section 16 of the 1940 Act not to require such
meetings); or (b) comply with Sections 16(a) and 16(c) of the 1940 Act
and, if and when applicable, Section 16(b) of the 1940 Act. Further,
the Fund will act in accordance with the Commission's interpretation of
the requirements of Section 16(a) with respect to periodic election of
directors, and with whatever rules the Commission may promulgate with
respect thereto.
12. The Fund shall disclose in its prospectus that: (a) It is
intended as a funding vehicle for all types of variable annuity and
variable life insurance contracts offered by various insurance
companies; (b) material irreconcilable conflicts between the interests
of contract owners of all Separate Accounts investing in the Fund may
arise; and (c) the directors of the Fund will monitor events in order
to identify the existence of any material irreconcilable conflicts and
to determine what action, if any, should be taken in response to any
such conflict. The Fund will notify all Participating Insurance
Companies that Separate Account prospectus disclosure regarding
potential risks of ``mixed'' and ``shared'' funding may be appropriate.
13. If and to the extent that Rules 6e-2 and Rule 6e-3(T) under the
1940 Act are amended, or Rule 6e-3 under the 1940 Act is adopted, to
provide exemptive relief from any provision of the 1940 Act or the
rules promulgated thereunder with respect to ``mixed'' or ``shared''
funding on terms and conditions materially different from any
exemptions granted in the order requested in this application, the Fund
and/or Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2, 6e-3(T), or
Rule 6e-3, as such rules are applicable.
14. At least annually, the Participating Insurance Companies and/or
DFA shall submit to the directors of the Fund such reports, materials,
or data as the directors reasonably may request so that the directors
may fully carry out the obligations imposed upon the board of directors
by the conditions contained in this application; said reports,
materials, and data shall be submitted more frequently if deemed
appropriate by the directors. The obligations of the Participating
Insurance Companies to provide these reports, materials, and data to
the directors of the Fund upon reasonable request shall be a
contractual obligation of all Participating Insurance Companies under
their agreements governing participation in the Fund.
15. All reports of potential or existing conflicts received by the
directors of the Fund, and all actions by the directors with regard to
determining the existence of a conflict, notifying Participating
Insurance Companies of a conflict, and determining whether any proposed
action adequately remedies a conflict, will be properly recorded in the
minutes of the directors or other appropriate records. Such minutes and
other records shall be made available to the Commission upon request.
Conclusion
For the reasons stated above, Applicants submit that the requested
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act,
and Rules 6e-2 and 6e-3(T) thereunder are appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
Accordingly, Applicants submit that the requested exemptions meet the
applicable statutory standards of Section 6(c) of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27446 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M